Security Capital Assurance Opportunity on Industry Downgrade

According to Friday's FT, Fitch Ratings has downgraded Ambac (ABK), who I blogged on earlier this month, from triple-A to double-A, as well as its smaller rival Security Capital Assurance (SCA) from triple-A to A, "sending shares in bond insurers sharply lower."

It also said that:

Private equity companies, including TPG, value investors such as Wilbur Ross and asset management firms, are all considering launching bond insurers in a move that could hamper efforts to aid troubled incumbents such as Ambac and MBIA.

Friday, Ambac has a %MCOL of 27.35%, with a Utilisation percentage of 44.61%. MBIA's (MBI) %MCOL stands at 25.54%, with Utilisation at 39.85%.

The borrow in SCA increased significantly in early October, when the % Market Cap on Loan (%MCOL) rose from 7.5% to nearly 25% in the space of three weeks. Since then it has ebbed around the 15% mark. Interestingly the borrow in SCA has now reduced; down from 13% earlier this week to 6.15% Friday (please see graph below). The share price has dropped from $35 in May to $5 Friday, although there has been a slight rise in share price which could explain why short sellers have decreased their positions.

Utilization has also decreased. The percentage of what is available to borrow that was on loan once reached 70% (in late October), but it has now dropped down to 22%, although this is an increase from 20% at the start of this week. For those wishing to return shares, there are 11.85 Days to Cover. The rest of the North America Insurance Sector's Utilization stands at 8%, but the rest of the US Equity (Other) Market stands at 20%, just below SCA's.

The borrow has also risen in PMA Capital Corp (PMACA), who are in the same sector as SCA and who have a debt service. The %MCOL has risen from 3% in January 2007 to 9% Friday. The share price has also dropped, from $11 in June to $8 Friday. It is still relatively easy to borrow the stock, with Utilization at 27%.